Bay Street in Toronto's financial district is shown on Wednesday, March 18, 2020.Nathan Denette/The Canadian Press
The turmoil continued in Ottawa and Washington in early January—bigly. Justin Trudeau resigned as Canada’s Prime Minister and Donald Trump was inaugurated as the 47th U.S. President. How do savvy bond traders and portfolio managers separate political tumult from fundamentals? We asked Darcy Briggs, senior vice-president and portfolio manager with fund giant Franklin Templeton Canada.
1. Remember that bond markets are really big. The total U.S. bond market—government and corporate—is about $57 trillion. In Canada, the market is about $5.4 trillion, and Briggs oversees $5.5 billion. The global bond market is over $220 trillion. “That’s a lot of debt,” he says. Those markets are unlikely to be rattled by headlines—even several days of them.
2. Some bond market clichés are true, says Briggs. “Central banks control the front end of the yield curve [market yields on bonds maturing in a few years or less], and the back end of the yield curve [yields on bonds maturing, say, in 10 years or more] reflects expectations of growth and inflation.”
3. From 2022 to 2024, yield curves were inverted as central banks hiked policy interest rates to fight inflation. But they’ve since cut rates to restimulate growth, and curves slope up to the right again. “Canadian rates are less than U.S. ones because of sluggish economic performance here and chronic productivity challenges,” Briggs says.
4. Politics occasionally knock markets for a loop. One example, Briggs says, is then–British PM Liz Truss’s controversial minibudget in September 2022, which slashed taxes and forecast much higher future deficits. “The long end of the yield curve blew out,” he says. Bond prices (which move opposite to yields) plunged, and yields skyrocketed. Truss stepped down after 50 days in office.
5. So what will Trump 2.0 bring? If Canada keeps rates down to help with a wave of mortgage renewals in 2025, and if Trump implements pro-growth policies that include tax cuts and deregulation, and doesn’t impose many tariffs, and if U.S. inflation remains low, “I think yield curves will be normalized,” Briggs says. That’s a lot of ifs.
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